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500 Years and Counting: 16th Century Legal Principles Resonate in Modern Fraudulent Transfer Jurisprudence

Anglo-American legislators and judges have been dealing with the treatment of debtors’ transactions that adversely affect their creditors at least since the Sixteenth Century.  In 1571, Parliament enacted the famous statute with the short title “An act against fraudulent deeds, alienations &c.”[1]  That statute criminalized fraudulent transactions that “delay, hinder or defraud creditors,” but inventive common-law judges promptly found in it what today we would call an implied private right of action to avoid such transactions.[2]

The Statute of 13 Eliz. was received into the common law of the 13 colonies at the time of Independence in 1776, and it or its progeny have been a part of our law ever since.  Early in the Twentieth Century, a vigorous and quite successful attempt to modernize and harmonize the law of the states was made with the promulgation by the Uniform Laws Commission[3] of the Uniform Fraudulent Conveyance Act (“UFCA”) in 1918.  The UFCA was succeeded by the Uniform Fraudulent Transfer Act (“UFTA”) in 1984, which in turn was succeeded by the Uniform Voidable Transactions Act (“UVTA”) in 2014.[4]  Other American progeny of 13 Eliz. are Section 67d of the U.S. Bankruptcy Act of 1898 (repealed 1978) and Section 548 of the current Bankruptcy Code, Title 11 of the U.S. Code.

All of that rich history came to mind as I was marveling at the dedication and ingenuity of the late alleged fraudster recounted in Senior District Judge Leo Glasser’s new decision in United States v. Lax,[5] an action by the IRS in its capacity as a present and future creditor of a taxpayer and his estate against the estate and the taxpayer’s many executors, enablers, transferees, vehicles and agents.  The IRS alleged that, between the time he was diagnosed with cancer and his death about two years later, the taxpayer planned and, with the participation of many other persons and entities, effectuated 10 elaborate and convoluted schemes to defraud the IRS involving transfers of real estate (and entities owning real estate) and diamonds (and entities dealing in diamonds).  The IRS sought the avoidance of the transfers under the DCL and the imposition of personal liability upon some of the individual defendants.

One of the defendants, the decedent’s daughter-in-law (and wife of one of the executors), moved to dismiss the IRS’s claims against her to the extent that they seek to impose personal liability for damages upon her.  In the course of denying her motion, Judge Glasser made these observations that are good reminders of some fraudulent-transfer law basics that rarely come up together in the same case with the same clarity:

  • Although the UFCA does not expressly provide for money damages, “[c]ourts have recognized . . . that an implied right of action for damages exists where ‘the traditional fraudulent conveyance remedy of rescission is no longer practicable’—where, for example, the transferred assets have been sold or commingled with other assets.”[6]
  • Liability may be imposed upon a defendant who was either a transferee or the beneficiary of a transfer--liability does not require both.[7]  Judge Glasser gives a shareholder of a transferee corporation as an example of a non-transferee beneficiary.
  • Liability for damages as a result of being a beneficiary of a transfer to a corporation does not require satisfaction of the factors for “piercing the corporate veil” of that corporation.  “[O]nce it has been established that a defendant benefited from a fraudulent conveyance, it is unnecessary to consider whether the traditional prerequisites for veil-piercing are satisfied.”[8]
  • There is a split in the case law whether personal liability for damages requires active participation in the transaction or whether the passive participation of being a transferee or beneficiary is sufficient.[9]  The decision does not take a position on the issue because the movant was unquestionably alleged to have been an active participant.
  • It is not a defense that the defendant’s participation was undertaken at the request or direction of another (in this case, the movant’s husband, one of the executors).  “A wrong is a wrong, regardless of whether the wrongdoer carries it out on her own initiative or at the request of another.”[10]
  • It is also not a defense that the defendant did not know that the transaction was wrongful.  The statutory defense against avoidance requires proof of both “fair consideration” and the lack of “knowledge of the fraud.”[11]  By implication, when a damages remedy is sought because avoidance has become impractical, mere lack of knowledge of the fraud is not a defense to liability.[12]

If the rule were otherwise, a debtor could easily circumvent the purposes and objectives of the DCL by giving the assets to a friend or relative, keeping them blissfully unaware of the fraud while retaining de facto control over the assets (or their proceeds, if the assets are later sold).[13] 

[1]  Statute of 13 Elizabeth chapter 5 (1571).  (The “13” signifies that it was enacted in the thirteenth year of the reign of Queen Elizabeth I.)  The long title has a certain antiquarian charm, at least for historically-minded commercial and insolvency lawyers, and serves as a reminder of the societal necessity for the statute:  An act-

For the avoiding and abolishing of feigned, covinous and fraudulent feoffments, gifts, grants, alienations, bonds, suits, judgments and executions, as well of lands and tenements as of goods and chattels, more commonly used and practised in these days than hath been seen or heard of heretofore; which feoffments, gifts, grants, alienations, conveyances, bonds, suits, judgments and executions have been and are devised and contrived of malice, fraud, covin, collusion or guile, to the end, purpose and intent, to delay, hinder or defraud creditors and others of their just and lawful actions, suits, debts, accounts, damages, penalties, forfeitures, heriots, mortuaries and reliefs, not only to the let or hindrance of the due course and execution of law and justice, but also to the overthrow of all true and plain dealing, bargaining and chevisance between man and man, without the which no commonwealth or civil society can be maintained or continued.

To the Statute of 13 Eliz. we owe a debt for not only language in current law (e.g., a slight variation of the phrase “delay, hinder or defraud creditors” appears in the U.S. Bankruptcy Code and the statutes of virtually every U.S. state) but also important concepts (e.g., immunity for transferees who acted in good faith and paid fair consideration). 

[2]  Mannocke’s Case, 78 Eng. Rep. 661 (King’s Bench 1571).  See V. Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand. L. Rev. 713, 714 (1985).

[3]  The ULC was then known as the National Conference of Commissioners on Uniform State Laws.

[4]  See K. Kettering, The Uniform Voidable Transactions Act; or, the 2014 Amendments to the Uniform Fraudulent Transfer Act, 70 Bus. Law. 777 (2015).  Almost all of the states adopted the UFCA, and most of them (and some others) adopted the UFTA.  New York was an early adopter of the UFCA.  However, it has never adopted the UFTA despite the lobbying efforts of this blogger and many others, and the century-old UFCA (with some non-uniformities) remains the law of New York to this day.  N.Y. Debtor-Creditor Law Article 10 (hereinafter “DCL”).  On May 8, 2019, the New York Legislature enacted the UVTA to replace Article 10 of the DCL, but, as of the writing of this blog post, it still awaits the signature of Gov. Andrew Cuomo.  The UVTA has been adopted by 20 states (including California and Pennsylvania) in addition to New York; it is pending in the Massachusetts Legislature.

[5]  2019 U.S. Dist. LEXIS 177231 (E.D.N.Y. Oct. 11, 2019)(hereinafter “Lax”).

[6]  Lax at *14, quoting In re Adelphia Recovery Trust, 634 F.3d 678, 692-93 (2d Cir. 2011)(hereinafter “Adelphia”).

[7]  Lax at *15-17 (citing many cases).

[8]  Lax at *17 (alternative ground; footnote omitted).

[9]  Lax at *21-23.  Sullivan v. Kodsi, 373 F. Supp. 2d 302, 309 (S.D.N.Y. 2005), is cited for requiring active participation, while Fannie Mae v. Olympia Mortgage Corp., 792 F. Supp. 645, 655 (E.D.N.Y. 2011), is cited for the sufficiency of the passive participation of being a mere transferee or beneficiary.

[10]  Lax at *21.

[11]  Section 278 of the DCL, which is derived from Section 9 of the UFCA.

[12]  Lax at *24, citing Adelphia at 692.

[13]  Id.